Paper P1 Performance Operations: Variance Analysis Is a Standard Management Accounting Technique, but Too Many P1 Candidates Struggle to Apply It Because They Don't Bother to Understand What All the Variances Actually Mean

Financial Management (UK), July-August 2012 | Go to article overview

Paper P1 Performance Operations: Variance Analysis Is a Standard Management Accounting Technique, but Too Many P1 Candidates Struggle to Apply It Because They Don't Bother to Understand What All the Variances Actually Mean


Students tend to find the P1 exam difficult because the information given in the scenarios and the requirements vary considerably from question to question. Rote learning for this paper, therefore, will not be effective.

Section C of the exam often includes a question requiring a variance analysis. I have invariably been disappointed by how badly most candidates have performed on answering such questions, particularly because it's a core area of the syllabus that they should see as their bread and butter. Post-exam guides have stated that students tend to try to learn by rote for this subject, rather than understanding what they are trying to achieve. Variance analysis is not about learning formulas; it's about working out what the variances mean. Once these are understood, the figures necessary to calculate them usually become clear.

Let's attempt question 3 in section C of the November 2011 P1 paper, which required candidates to perform a variance analysis. Here is the scenario it gives, along with part A of the requirement:

TP makes wedding cakes that are sold to specialist retail outlets, which decorate the cakes according to the customers' specific requirements. The standard cost per unit of its most popular cake is as follows:

Direct material:                                $

  Ingredient A        4kg at $25 per kg        100

  Ingredient B        3kg at $22 per kg         66

  Ingredient C        2kg at $11.50 per kg      23

Direct labour:        3 hours at $12 per hour   36

Variable overhead:    3 hours at $8 per hour    24

Standard cost:                                 249

The budgeted production for the period was 10,000 units.

Actual results for the period were as follows: Production: 9,000 units.

Direct material:                        $

  Ingredient A        35,000kg      910,000

  Ingredient B        28,000kg      630,000

  Ingredient C        27,000kg      296,000

Direct labour:        30,000 hours  385,000

Variable overhead:                  230,000

The general market prices at the time of purchase for ingredient A and ingredient B were $23 per kg and $20 per kg respectively.

TP operates a just-in-time (JIT) purchasing system for ingredients and a JIT production system. Therefore, there was no inventory during the period.

Prepare a statement that reconciles the flexed budget material cost and the actual material cost. Your statement should include the material price planning variances and the operational variances, including material price, material mix and material yield (12 marks).

The first thing to note is that a reconciliation statement is required. Many candidates didn't produce a statement and, while this omission was treated fairly leniently in the marking, the post-exam guide for that paper warned that this might not always be the case. Such questions test not only your ability to calculate variances, but also your ability to calculate the appropriate variances that will explain the difference between the budget figures and the actual figures.

In addition, the reconciliation should be between the "flexed budget material cost" and the actual material cost. The original production budget was 10,000 units, but only 9,000 units were actually made. Therefore we need to reconcile the budget cost of 9,000 units--i.e. the flexed budget--with the actual cost of 9,000 units.

The second part of the requirement makes it clear which variances need to be calculated: the material price planning variances and the operational variances, including the material price, material mix and material yield variances. Despite this, a disappointingly high number of candidates wasted a lot of valuable time calculating labour variances and variable overhead variances. This may have been because questions they had practised during their revision required the reconciliation of profit or contribution. …

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